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U.S. Supreme Court May Review Colorado Online Sales Tax Law

  • Mar 4, 2014 | Gail Cole

 Will the Supreme Court gavel fall on Colorado's use tax reporting requirement for remote retailers?

The United States Supreme Court has been asked to review Colorado's 2010 online sales tax law. If it agrees to do so, it would be the first time the Supreme Court tackles the issue of remote sales tax. A decision would likely impact other state online sales tax laws, in addition to the Colorado law.

Colorado online sales tax law

The Colorado online sales tax law does not require remote retailers to collect Colorado sales tax. Rather, it requires non-collecting remote retailers who make more than $100,000 in Colorado sales during a calendar year to 1.) provide customers with a year-end summary of their purchases and 2.) provide the Colorado Department of Revenue with an "annual report of the total dollar amount of all of a Colorado purchaser’s Colorado purchases...." This information would in theory allow the Colorado Department of Revenue to increase use tax compliance. Unlike sales tax, which is collected and remitted by sellers, use tax is reported by buyers and is notoriously difficult to enforce. With the notification requirement in effect, buyers would not be able to ignore their use tax obligations.

The Direct Marketing Association (DMA), a trade association representing thousands of businesses, took the Colorado Department of Revenue to court over this law. According to the DMA, Colorado’s online sales tax law forces "remote retailers to choose between obeying the notice and reporting requirements and remitting sales tax to the Department.” DMA claims this is a violation of the U.S. Commerce Clause (Tenth Court August 20, 2013, opinion).

In August 2013 the U.S. Court of Appeals for the Tenth Circuit determined that Colorado does provide “avenues for remote retailers to challenge the scheme allegedly forcing them to choose between collecting sales tax and complying with the notice and reporting requirements.” Therefore, it concluded, “we… have no jurisdiction to reach the merits of this appeal. We remand for the district court to dismiss DMA’s Commerce Clause claims for lack of jurisdiction, dissolve the permanent injunction entered against the Department….” The opinion’s notes suggest that there is also basis for “dismissal” rather than remanding back to the lower court.

It is this decision the DMA wants the United States Supreme Court to review. Last week, attorneys for the Direct Marketing Association (DMA) filed a petition for a writ of certiorari, asking the high court to review the U.S. Court of Appeals' ruling. If the petition is approved, the Supreme Court may at last be drawn into the nation’s ongoing online sales tax debate.

Solution by Supreme Court

Increasingly, states are attempting to capture sales tax revenue from remote retailers—retailers who have long been able to avoid collecting sales tax because they don’t have nexus (the connection with a state that triggers a tax obligation). As more and more retail sales take place via remote vendors, state sales tax revenue has decreased. To recapture it, states are working to expand sales tax to remote sales.

Main Street businesses applaud this action, but online vendors do not. More than one state has found its affiliate nexus laws (e.g., laws that base nexus on links on locally owned websites) challenged in court. Both Amazon.com and Overstock.com tried to take the New York affiliate nexus law to the United States Supreme court, but the high court denied their petition for a writ of certiorari.

To date, the Supreme Court has refused to get involved. The Colorado case could be the turning point.

Solution by federal government

Many businesses and lawmakers believe the federal government will have to get involved in the issue of online sales tax. The Marketplace Fairness Act of 2013 (MFA) would grant states with simplified sales tax the right impose a sales tax obligation on certain remote retailers. The U.S. Senate approved MFA in May of last year and since then it has been gathering dust in Congress.

After a long delay, the House Judiciary Committee is set to have a hearing on the matter as soon as weather permits.

Meanwhile, back in the lower court…

Meanwhile, the Colorado remote retailer use tax notification case returned to Colorado district court. On February 18, Denver District Court Judge Morris Hoffman granted a preliminary injunction against Colorado’s use tax reporting requirement. The Colorado Department of Revenue then announced that retailers are not at this time required to comply with “these reporting requirements.” For the DMA, this was a victory.

Yet Judge Hoffman stressed that his conclusions were not “written in stone.”

DMA would like the case decided and the decision written in stone, or at least the modern-day equivalent. The United States Supreme Court has until March 31, 2014, to respond to DMA’s petition for a writ of certiorari. It's decision could have an enormous impact on online sales tax laws around the country.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.